Watchdog acts to halt sell-off

Thursday 27 June 2002 23:00 BST

THE CITY'S watchdog is acting to staunch the sell-off in stocks that has set the market on course for its second worst performance in 25 years. The Financial Services Authority said it will revise rules that have forced insurers to sell more stocks.

The FSA's 'resilience test' - used to assess a firm's solvency - requires insurers to have sufficient capital to withstand a 25% fall in share markets from their current levels. The FSA said the revised test would enable insurers to take into account past falls in share prices.

There had been fears that the current requirements have encouraged insurers to keep selling shares even as markets fall, sending stocks into a spiral.

Latest figures show the market's losses of the first half are likely to overshadow the drop suffered during last year's technology shake-out and the soaring interest rates of 1990.

Only in 1994, when the nation was gripped by fears of a double-dip recession and negative equity in the housing market, did share prices post a bigger first-half fall than that recorded this year.

The FTSE 100 has lost 12% this year compared with the 10% drop recorded at the same time last year and the 2 1/2% fall in the equivalent period of 1990, when rising interest rates were beginning to bite.

However, times were marginally worse in the first half of 1994, when the index plummeted more than 14% amid an economic malaise involving weak consumer confidence, collapsing bond markets and a housing market riddled by negative equity.

The plunge has left investors in UK tracker funds nursing losses of more than £1.6bn, prompting suggestions among some that the sector could become the subject of a mis-selling investigation by the FSA. The popularity of tracker funds has soared in recent years and there is a belief in some circles that many were sold with the implied suggestion that they were relatively risk free.

Traders say fears that the inssurers are about to dump substantial parcels of stock have played a big role in helping to push the market down this week. They also report a big increase in the past fortnight in the use of options by the institutions as a hedge against further falls, suggesting they believe more losses are a strong possibility.

NatWest Stockbrokers' Jeremy Batstone said the overall UK market was now trading on a 'very reasonable' forward earnings multiple of 16 1/2 times. This was fuelling hopes that bargain-hunters and some improved earnings figures from the US would trigger a rally in the third quarter.

The slump in share prices has not led to a corresponding fall in market activity, with the number of trades rising to 14.4bn for the first five months of this year from 12.9bn at the same time last year. The total value of trading fell from £859bn to £782bn.